Broker fears were confirmed Tuesday, with one big bank raising its prime rate less than a month following new mortgage rules.

TD Canada Trust announced in a note to brokers Tuesday that it is changing its mortgage rates, including increasing its prime rate to 2.85%.

The prime rate has been held at 2.70% for more than a year, according to the broker who shared the announcement with MortgageBrokerNews.ca on condition of anonymity.
“When a bank changes their ‘version’ of bank prime it also serves as an invitation for the other banks to join in and do the same,” the broker said. “Naturally if they all change the public is screwed and all the banks make more profit.
“You see by effectively changing the goal posts on the rate the bank can continue to say: ‘we are prime less 0.50% which is a good deal.’ So as you can see this a clever move if it works.”

The announcement also confirms what one economist speculated – that big banks could influence the market by altering its posted rates.

The new mortgage rate stress test, which forces all holders of insured mortgages to qualify at the Bank of Canada’s benchmark five-year rate.

The Bank of Canada’s benchmark rate is closely tied to big bank posted rates. And that relationship could allow lenders to tinker with their posted rates in a bid to influence the BoC’s, thereby allowing them to also influence the ease with which homebuyers can qualify for an insured mortgage.

“Another possible solution is that posted rates could fall, reducing the impacts of the stress tests. Since they are not set by the market, lenders could decide to lower them if, for example, they find that they are saying “no” to too much good business,” Will Dunning, chief economist of Mortgage Professionals Canada, wrote in a research paper entitled Slamming on the Brakes: Assessing the Impact of Changed Criteria for Mortgage Qualification. “The posted rates are set administratively by the lenders, based on their assessments of what is in their best interests, and their assessments could change.”

Toronto Dominion Bank has become the first major lender to hike its mortgage rates after Ottawa’s move last month to change some of the rules that govern insured mortages.

The bank’s mortgage prime rate is rising 0.15 points to 2.85 per cent, effective immediately, after it had remained steady for 15 months.

Only customers with variable rate mortgages will be affected, the bank said in a statement, while fixed-rate customers should see no change. Other products such as lines of credit are not affected.

“We regularly review our rates and adjust them based on a number of factors, including the cost that TD pays to fund mortgages,” the bank said. “Increasing our rates is not a decision we take lightly. We consider the impact on our customers before proceeding with any rate change, and we communicate directly with customers whose loans or mortgages are affected.”

It’s rare for the big banks to leave much gap between themselves on their prime lending rates, so other major lenders are expected to follow suit. CBC News has reached out to Royal, CIBC, Scotiabank and BMO for comment, but none was immediately available.

James Laird, a co-founder of rate-comparing website RateHub and president of mortgage brokerage Canwise Financial, says he can’t recall the last time a major bank moved its prime lending rate out of step with the Bank of Canada, which has been on the sidelines for all of this year and is next scheduled to meet next month.
“That being said, there’s been some very major changes to the mortgage industry,” he said in an interview. “This could be in anticipation of higher funding costs when the new rules come in.”

In addition to a new stress test for borrowers, Ottawa also implemented new rules set to kick in at the end of this month that will make many types of mortgages ineligible for bulk insurance — which is one of the cheapest ways for banks to ensure their loans.

That means in less than a month, many types of the big banks’ most common housing loans will get marginally more expensive then. So TD moving to raise their mortgage rates could be a way of recouping those added costs to come, Laird said.

“Without being able to ensure those mortgages,” Laird said “we can point to that as a likely reason for today’s news.”